Cisco Sees Growth in China Despite Trade Tensions as Electric Vehicle Makers Expand Overseas
Cisco, the American technology giant, is optimistic about its expanding business with Chinese electric car companies as they push into international markets. Despite escalating trade tensions and increased tariffs on Chinese EV imports, these companies are continuing to invest in overseas factories and research and development, creating opportunities for Cisco’s networking equipment and software. Cisco’s Greater China CEO, Ming Wong, told CNBC that the EV sector is the company’s second-largest market in the region, with electric cars forming the largest segment within the manufacturing sector.
Key Takeaways:
- Cisco is "very optimistic" about its growing business with Chinese electric vehicle companies expanding overseas. This optimism stems from the growing international footprint of Chinese EV companies like BYD, despite trade tensions and tariffs on Chinese imports.
- Cisco is working with at least 10 electric car customers as they build factories, offices, and R&D centers abroad. This activity indicates significant investment and potential revenue for Cisco.
- Chinese EV makers are investing in local factories, highlighting a shift in strategy to bypass trade barriers. This approach could accelerate their global expansion and further drive demand for Cisco’s networking solutions.
- Cisco sees a potential for growth in the China market, although it faced challenges due to the trade war and restrictions on government contracts. The company is now focusing on state-owned and non-state-owned businesses expanding globally, as well as partnering with Chinese internet companies like Alibaba that have an international presence.
- Cisco’s revenue in the Asia-Pacific, Japan, and China region fell 12% during its latest quarter, but management expects a rebound in the next one or two years. The company believes the region remains its highest growth area.
The news of Cisco’s optimism in the Chinese electric vehicle market comes at a time when tensions between the United States and China are continuing to escalate. Trade tensions have impacted Cisco’s business in China previously, with revenue falling by 25% in the quarter ending July 2019. CEO Chuck Robbins attributed this decline to the trade war, stating that Cisco was “uninvited to bid” on government contracts and faced a decline in sales to Chinese carriers.
However, Cisco’s current focus on the global expansion of Chinese EV makers marks a shift in strategy. The company is no longer solely dependent on government contracts and is instead targeting businesses with a global footprint. This strategy aligns with the increasing international presence of Chinese companies, including electric vehicle manufacturers.
Chinese EV companies like BYD are investing in local factories in key target markets to avoid trade barriers and expedite their global expansion. This approach, known as "glocalization," demonstrates a strategic shift by these companies to meet local demands and potentially navigate trade tensions. While tariffs will likely accelerate their capital expenditure (capex) on manufacturing and office facilities, it is clear that Chinese EV makers are determined to expand their presence in the global market.
Cisco’s strong focus on AI and security solutions is also contributing to its growth potential. The company is benefiting from the expansion of Chinese internet companies like Alibaba, which require sophisticated networking infrastructure to support their global operations. Cisco’s ability to connect various GPU providers together is another key factor driving growth, especially in the AI sector where Nvidia faces restrictions in the Chinese market. GPUs are essential for the training and implementation of advanced artificial intelligence models, making Cisco’s expertise crucial for companies like Alibaba.
While Cisco’s revenue in the Asia-Pacific, Japan, and China region experienced a 12% decline in its most recent quarter, the company remains confident about the region’s future growth. Wong highlights the fact that the decline occurred from a high base and expects a faster growth trajectory in the next one or two years. This optimism stems from the company’s strong position in the region, particularly in the expanding electric vehicle and AI sectors.
The global electric vehicle market is expected to continue its rapid growth, with China playing a pivotal role in this development. This trend, coupled with Cisco’s focus on emerging markets and strategic partnerships, offers a compelling outlook for the company’s future growth in Greater China. As Chinese EV companies continue their ambitious global expansion, Cisco is well-positioned to capitalize on this opportunity and navigate the complexities of the evolving trade landscape.
